Budget surplus merits lower VAT rate on restaurants

A quick review of VAT charged on restaurants shows that Greece, in a bid to aid small businesses, bolster the tourism sector and reduce evasion, dropped its rate in August 2013, from 23% to 13% on a trial basis.

The experiment worked and yielded good results for a two-year period with higher VAT declarations. Due to austerity measures the rate was reverted backed to 23% in July 2015.

Similarly, we find how Spain and Italy charge 10% VAT on restaurants and on the provision of meals and beverages to be consumed immediately, even if they are made after the recipient’s order, while the Netherlands charges 6% on restaurants (excluding alcoholic beverages), take-away food, bars, cafes and night clubs. The trophy goes to Luxembourg as it charges the lowest rate of 3% VAT on food and 17% on alcoholic beverages.

Needless to say the penny drops when we ask why Malta charges a full rate of 18% VAT on restaurant business albeit 7% on hotel accommodation and on combined all-inclusive food and drink packages. Now that the tourism industry is firing on all cylinders can we follow Greece’s bold experiment and drop the rate on restaurants to 13% on a two-year trial period?

The dilemma facing restaurant owners is a real one and has been fearlessly exposed by Julian Sammut, managing director at Kitchen Concepts. He has identified a sclerosis in the system that blinded operators to make hay while the sun shines regardless of the long term sustainability of the industry. This may well be anathema and continuing in such an unbridled fashion may lead to tomorrow’s demise.

Now that the tourism industry is firing on all cylinders, can we follow Greece’s bold experiment and drop the rate on restaurants to 13% on a two-year trial period?

This article explains how burning the candle at both ends will cause the sector to implode if remedial action is not taken to tackle existing challenges. For this and other reasons PKF approached MHRA to obtain statistical data concerning viability trends of its members and to concur to join in an island-wide survey concerning all categories in the restaurant sector.

MHRA is sponsored by Bank of Valletta, which in turn supports a quarterly study of hotel market trends. No such study is conducted in the restaurant sector. Naturally, PKF wrote to BOV to support an ad hoc restaurant study as part of its corporate social responsibility yet a reply is pending.

In the meantime, PKF has concluded its study, having obtained details of revenue from selected restaurant owners for past years. It acknowledges the pioneering work by Julian Sammut (a fervent restaurant owner and successful businessman) who was recently interviewed exclusively on Sunday Independent about the future of the industry. He is managing more than ten major outlets at Kitchen Concepts Ltd., part of the giant food wholesaler and import firm Alf Mizzi & Sons.

In his candid interview, Sammut does not mince words and shoots from the hip at the problems besetting the eateries. In his opinion, these chronic problems, unless remedied, may lead to a cataclysmic downfall of the tourist industry. The root of the problem lies in the tax evasion both on VAT and corporate taxes while a good proportion of kitchen and waiting staff are employed at low rates or paid under the table. This tomfoolery continues, notwithstanding the heavy endowment allocated to MTA to promote high quality standard in catering partly by grading restaurants and also by bolstering tourism, by seeking new traffic from a cluster of locations served through low cost carriers.

Sadly, the practice of papering the cracks will not solve the issue of the dire financial situation arising from a fragmented market sector. Sammut remarked that some catering owners are facing increasing rents, a severe lack of entry-level staff and, last but not least, competition from foreigners setting up fast food outlets. These combined factors push owners to either abuse the system or trade on low margins and in the long run face failure. It is either this or, in extreme cases, businesses have to shut down. One questions if the landlord is earning more than the catering operator who risks, so much time and energy to meet all the health and safety requirements and to retain an adequate number of qualified staff. This problem compares metaphorically to a Hydra that raises its head above the water to devour start-ups which do not play the game. The game leads to money laundering by way of undeclared sales thus evading VAT and corporate taxes.

Such a strategy may be an inexcusable way in the short term in a bid to afford paying higher wages and salaries -necessary for staff retention. It goes without saying that such abuses will create a two-way structure – those who abide by the fiscal rules and suffer a lower return on capital and all the others that abusethe system and continue to employ non-EU workers at low wages. This vicious circle is a double-edged sword since while it pleases the workers in higher take-home pay yet in the long term it prejudices their future claim for pension and welfare payments. The industry is well aware that abuse exists and the finance minister is reported to have exclaimed that “This is a continuous struggle. Abuse can be limited, but never eliminated. What we need to do is address the black economy and treat it as a beast on its own. It creates unfair competition and loss of revenue”.

Even though business looks promising, more restaurant owners are struggling to retain quality staff. When foreigners are employed to fill the gaps, patrons complain that they cannot communicate properly. Equally there is a problem with untrained local staff attending the early stages at ITS as they are often vacillating.

It goes without saying that such abuses will create a two-way structure; those who abide by the fiscal rules and suffer a lower return on capital and all the others that abuse the system and continue to employ non-EU workers at low wages

Readers may disagree with such arguments. Some criticize restaurant owners who charge high menu rates when most of the time they are no match for the Michelin star even though they promote themselves as providing a silver service experience. Diners may conclude that as restaurants are always full, especially the good ones, then it is all gung ho. This bonanza comes not only as a result of the increase in tourist arrivals and a galloping economy but more so due to the deep pockets of ex-pats sporting attractive expense accounts. Surely this extra affluence generates more entertaining sprees at good restaurants and furthermore, as more tourists are opting to book private accommodation as opposed to hotels, they prefer to eat out.

This phenomenon is creating a new demand for quality restaurants.

In conclusion, restaurant owners face additional challenges due to cut -throat competition (now with many eateries run by Italians mushrooming all over the island) compounded with an unrelenting increase in property rents – a result of gentrification particularly in the Eldorado area of Sliema/St Julians.

George Mangion is a senior partner of an audit and consultancy firm, and has over twenty-five years experience in accounting, taxation, financial and consultancy services. His efforts have seen that PKF has been instrumental in establishing many companies in Malta and placed PKF in the forefront as professional financial service providers on the Island.